Obama Administration to Guarantee Mortgages Without Validation

In a move reminiscent of a process that led to the housing crisis in 2008, the Federal Housing Administration will insure refinanced mortgages for an estimated 2 million to 3 million borrowers who won't have to submit to the usual validation process.

Borrowers qualifying for the program, which doesn’t have congressional authorization, would be those holding mortgages that the FHA insured on or before May 31, 2009, and who are current on their mortgage payments, CNSNews.com reported.

In announcing the program, President Barack Obama said at a news conference on Tuesday, “Today we’re taking it a step further — we are cutting by more than half the refinancing fees that families pay for loans insured by the Federal Housing Administration. That’s going to save the typical family in that situation an extra $1,000 a year, on top of the savings that they’d also receive from refinancing . . . It’s like another tax cut that will put more money in people’s pockets. We’re going to do this on our own. We don’t need congressional authorization to do it.”

Departing from the normal underwriting process, the FHA will insure the mortgages without verifying whether the borrowers hold jobs or receive income.

“Basically that’s because they already have an FHA loan and that’s just refinancing the same loan,” Housing and Urban Development spokesman Lemar Wooley said.

“Even if their circumstances have changed, they are still managing to be current on the original higher priced mortgage, so that’s proof to the FHA that they can handle the lower payments,” Wooley told CNSNews.

But Reed Piano, managing director of the National Association of Mortgage Underwriters, said underwriting generally is done for both initial mortgages and refinancing. The normal underwriting process inspects “employment verification, income verification, analysis or thorough examination of a borrower’s creditworthiness based on a lender’s requirements, any federal or state requirements,” Piano told CNSNews.

The Obama administration estimates that 2 million to 3 million FHA borrowers are eligible.

The housing crisis in 2008 was caused by banks’ issuing loans to borrowers who could not afford them.

When asked whether underwriting refinance programs for the new program could create problems, Piano told CSNNews, “There’s always a possibility that it could cause problems. Lenders need to be always cautiously optimistic.”